Private equity buyers are burdening companies with huge debts
At the height of the Covid pandemic, you could be forgiven for feeling a touch sentimental towards Britain’s supermarkets. As we queued patiently for our rations, and applauded the shelf-stackers and delivery drivers, companies like Tesco, Sainsbury’s, Asda and Morrisons seemed to be a vital part of the collective effort.
But they are corporate businesses all the same, and their virtues have not gone unnoticed in booming world of private equity — at the more rapacious end of the world of finance.
Last week Morrisons called for a special auction to decide its future ownership following a bidding-war between two U.S.-based private equity firms. Asda was taken over back in February, and there is speculation that, before long, all the major British supermarkets may be in private hands.
As suggested by the fate of Debenhams — whose bankruptcy last year almost certainly had something to do with an earlier kneecapping by private equity — this is by no means good news for people who shop or work at these stores.
In theory, private equity firms want to make companies more profitable so as to ultimately sell them on, while pocketing a few extras along the way. In practice, private equity has a whole suitcase of dirty tricks for extracting quick profits out of companies, leaving them severely weakened in the process.
To begin with, there’s the ‘leveraged buyout’, which means that a company is bought almost entirely with borrowed money — debt which is then transferred onto the company’s own books. To help handle this debt, the business is streamlined, which inevitably entails cutting back on wages and sacking lots of staff.
Then there’s the infamous asset stripping. Assets held by the company, most notably property, are transferred to the private equity owners. The company then has to rent what it previously owned. And this is to say nothing of all the creative techniques for extracting ‘special dividends’ and management fees.
Take the case of Asda. The supermarket was taken over by a pair of petrol station tycoons from Bradford, the Issa brothers, together with private equity firm TDR Capital. But the new owners paid just ten percent of the £6.8 billion price tag. The rest came from a huge junk bond sale, and by selling off Asda’s warehouses and distribution system. The supermarket thus exchanged its assets for £3.7 billion in debt.
And nor is it just supermarkets. In the UK, everything from fast-food chains to healthcare firms have been bought up, and even major defence contractors are in the asset managers’ sights.
This last prospect led business secretary Kwasi Kwarteng to insist the government is monitoring takeover bids in light of national security risks. But given the experiences of the last 18 months, a similar logic must surely apply to supermarkets.
When the next crisis comes, do we really want to find that our main suppliers of food have been stripped of assets and laden with crushing debt burdens?